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Brookfield CEO Bruce Flatt says the growing world of private lending is replacing traditional fixed-income investments as the asset category of choice for investors looking for returns in a low-interest-rate world.LUCY NICHOLSON/Reuters

Private credit is the new fixed income for institutional investors, according to Brookfield Asset Management Inc. CEO Bruce Flatt, who says his investment colossus will build its lending business as part of its goal to double in size over the next five years.

Private credit is non-bank lending to businesses, through loans or debt instruments – such as bonds – that aren’t held by public investors. It’s a growing area for many big institutions – for example, Canada Pension Plan Investment Board has a private-credit department that chief executive officer John Graham led before his 2021 ascension to the top job. Brookfield’s Mr. Flatt said private debt now represents a global market of more than US$1-trillion.

Done well, it’s appealing to big institutions who are getting little to no yield from conventional bonds, particularly government-issued debt with rock-bottom rates. The risk, as Mr. Flatt acknowledged contained in a letter to shareholders accompanying Brookfield’s third-quarter results, is that increased competition in direct lending “has pushed returns lower and loosened lending standards in recent years.” Loose lending standards can create bad loans that equal big losses.

However, Mr. Flatt said Brookfield does it better. Its roots in direct lending can be traced back to 2001, and it currently characterizes about US$30-billion of its US$650-billion of its assets under management as direct lending.

He said Brookfield’s reputation allows it to limit competition and negotiate terms that include “significant downside protection” for it. Mr. Flatt said Brookfield positions itself as a strategic partner, rather than just a lender, attracting new borrowers and satisfied customers returning for more credit. “The combination of these factors has helped us generate a long track record of market-leading returns and minimal losses.”

In a response to an analyst question on the quarterly conference call, Brookfield chief financial officer Nicholas Goodman said Brookfield believes it can expand its direct-lending business without acquiring another lender.

Brookfield’s third quarter featured a steep increase in profits and continued robust fundraising for its investment vehicles. Brookfield attracts institutional investors to its giant portfolios of what it calls “alternative assets” – real estate, infrastructure, energy and distressed debt. The assets are placed in partnerships, some of which trade on U.S. and Canadian exchanges, and other private funds. Brookfield invests its own money alongside the capital from outsiders.

The company reported net income of US$2.72-billion in the quarter ended Sept. 30, up from US$542-million in the prior-year quarter. Distributable earnings, a measure Brookfield uses as a proxy for cash earnings that could be paid out to shareholders, were US$1.24-billion versus US$890-million in the prior-year quarter. (The number includes, among other things, fees from investors, distributions and dividends from investments, and realized gains from sales of assets.)

Brookfield said it’s had US$34-billion in inflows to various investment funds from July 1 to today, including a credit fund managed by its affiliate Oaktree Capital; its Global Transition climate-change fund; and a flagship real estate fund. All told, Brookfield has more than two dozen funds out in the market raising money, Mr. Flatt said.

The current mix of low interest rates and rising inflation is a good one for Brookfield, Mr. Flatt said. The “shutdown of most global logistics” has created supply disruptions that continue to spur increases in wages and the price of goods that Brookfield expects will even out in 2022. Meanwhile, Brookfield still anticipates interest-rate increases will be much less pronounced than in previous economic recoveries, leaving rates “lowish for longer.”

“As owners of real assets and businesses, most of which can raise prices contractually or with inflation, we are well positioned in this environment,” he wrote.

Brookfield’s transactions just since quarter-end include paying US$6-billion for the lottery unit of Scientific Games Corp. and a 10.2-billion Australian dollar ($9.36-billion) deal to buy Australian energy-infrastructure company AusNet Services Ltd. with a consortium that includes Alberta Investment Management Corp., the Investment Management Corp. of Ontario, and Healthcare of Ontario Pension Plan.

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